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Commercial Bank: Useful notes on Commercial Banks

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A Commercial Bank is a business organisation which deals in money; it borrows and lends money. In this borrowing and lending of money, it makes profit. The distinction between money lender and a commercial bank may be noted. Whereas money lender only lends money to others and that too from his own sources; a commercial bank does both the lending and borrowing businesses.

A commercial bank raises its resources through borrowing from the public in the form of deposits and lends them to the businessmen. Its lending rate of interest is greater than that it pays to its depositors. It is because of this difference in lending and borrowing rates of interest that it is able to make profits.

Now, a curious student will ask the question how the institution of banking originated and evolved. The banking owes its origin to the activities of goldsmiths in England. In the Seven­teenth Century, goldsmiths in England possessed strongest safe vaults where valuable goods such as gold, silver, diamonds could be kept safely. Therefore, the rich people in England at that time used to keep their valuable things such as gold and silver with the goldsmiths and obtained receipts from them for their deposits of gold and silver.

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At a later stage it was found that these deposits with goldsmiths could serve as money, that is, a medium of exchange. The person who had a deposits of gold and silver with a goldsmith could pay off his debt simply by endorsing the deposit receipt in favour of the person to whom he has to pay back the loan. In this way gold and silver got automatically transferred to another person even though they remained in the safe custody of the goldsmiths.

It was soon discovered that there was no need for endorsing the whole deposit receipt in favour of the other person. With deposits of gold and silver a person could issue a letter to his goldsmith instructing him to transfer a certain amount of gold or silver to another person. Obviously from this practice emerged the present-day system of payment through cheques.

Another important development took place when goldsmiths realised that a good amount of gold deposited with them remained idle for long as only the ownership of them changed through transfer. From this they concluded that they could issue more deposit receipts than the actual deposits of gold and silver with them to meet the financial needs of some persons and started charging some interest on them.